When we’re in a bull market, markets will push aside bearish news and continue with the longer-term trend. Remember, Elliott Wave is a picture of the psychology of the markets. Even if an economic report is terrible for the markets, if we’re in a bull market and the wave counts are strong, the market will head higher. Elliott Wave can tell you when we are in a bull market and when the market is willing to push aside poor data. So, yes, we look at fundamentals all day long. But we don’t trade the fundamentals. We’ll trade people’s expected reactions to the fundamentals—and that’s the key difference.
Bourquin: That’s fascinating. So what that says to me is that you were so confident in the Elliott Wave that you’re willing to disregard even a huge economic report. You’re willing to trade through it because of what you see on the chart with the Elliott Wave?
Gordon: How many times have you seen a report that comes in on the weak side but then the market rallies?

…

The point is you really need to get more technical to trade FX, because it’s so much more of a chess game than a boxing match with an opponent [the specialist], which is what day trading equities was.
Bourquin: I know that at some point you settled on Elliott Wave. When did that happen?
Gordon: That happened early in my time at FOREX.com. I had some knowledge of it, and we had access to a bunch of investment bank research. FOREX.com and the other Forex companies within the currency markets would hedge their business with the big investment banks, and we were big clients of companies like UBS, Barclay’s, Goldman Sachs, and Lehman at the time, if you can believe it. Because of this relationship, we would get bank research, and there were a couple guys at each bank that I followed closely.
There was a guy at UBS named Jim Short who did Elliott Wave. There was also a guy at Goldman who did Elliott Wave analysis, and I would watch and read their stuff every day. I e-mailed them and bothered them all the time with questions about Elliott Wave.

…

Bourquin: You mentioned that fundamentals don’t figure much into your trading. When you place a trade based on your Elliott Wave counts, do you care, for instance, that on the day that we’re doing this interview, the nonfarm payrolls [NFP] economic report has come out? Do you care about those events, or do you trade regardless of them?
Gordon: I trade through them all day long if the Elliott Wave count is strong enough. For example, today we had a long Australian dollar position that we put on this past Wednesday. We took half our position off for a profit before the announcement. We came into NFP today with a long Aussie dollar position, which would correlate to higher stock prices. Because the Elliott Wave count said we were in the middle of a good wave 3 breakout, I said, “We’re carrying this position through NFP.”

Elliott’s Tale
The power of a good story may explain the enduring appeal of the Elliott
Wave Principle (EWP), one of TA’s more grandiose conjectures. The Elliott Wave Principle holds that price waves express a universal order and
form that is found not only in the ﬂuctuations of ﬁnancial markets but
throughout the natural world, including the shapes of sea shells, galaxies,
pine cones, sunﬂowers, and numerous other natural phenomena.
According to EWP, market trends are fractal—a nested hierarchy of
waves sharing the same form but ranging in magnitude and duration
from microwaves that last only minutes to grand millennial macrowaves
that can last for thousands of years.65 This shared form, called the Elliott
wave, is an eight-segment conﬁguration of rising and falling price movements. In fact this universal pattern of growth and decay is alleged to describe not only the evolution of prices in ﬁnancial markets; it is also
manifested in the evolution of trends in mass psychology, the rise and
fall of civilizations, cultural fashions, and other social trends.

…

In fact this universal pattern of growth and decay is alleged to describe not only the evolution of prices in ﬁnancial markets; it is also
manifested in the evolution of trends in mass psychology, the rise and
fall of civilizations, cultural fashions, and other social trends. The theory
claims to describe just about anything that goes through cycles of
growth and change. Even the business career of Elliott wave’s leading
advocate Robert Prechter, according to Prechter himself, has followed a
series of ups and downs that conform to the Elliott Wave Principle. This
The Illusory Validity of Subjective Technical Analysis
61
all ties in with a sequence of numbers called the Fibonacci series and
the golden ratio phi, which does have many fascinating mathematical
properties.66
However, that which purports to explain everything explains nothing.
The Elliott Wave Principle, as popularly practiced, is not a legitimate theory but a story, and a compelling one that is eloquently told by Robert
Prechter.67 The account is especially persuasive because EWP has the
seemingly remarkable ability to ﬁt any segment of market history down to
its most minute ﬂuctuations.

…

Gann analysis, among others.
For example, the Elliott Wave Principle is based on an elaborate causal
70
METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS
explanation invoking universal forces that shape, not only the physical
world, but mass psychology, culture, and society as well. Moreover, it has
high retroﬁt power. By employing a large number of nested waves that can
vary in both duration and magnitude, it is possible to derive an Elliott
wave count (i.e., ﬁt) for any prior segment of historical data. However, except for one objective version95 of Elliott waves, the method does not generate testable/falsiﬁable predictions.
Let’s consider the ﬁrst element, an elaborate causal explanation. TA
methods that are based on intricate causal stories are able to withstand
empirical challenges because they speak to the deeply felt human need to
make sense of the world.

As a result, they want to catch market turning points.
In addition, it’s a highly marketable idea to sell to the public. There
are a number of different types of theories involving market order,
including Gann, Elliott Wave, astrological theories, etc.
I elected to write this party of this chapter myself because (1)
someone who is an expert ins one market-orderliness theory is not
The first concept says that the markets are a function of human
behavior and that the motives of human beings can be characterized by a certain structure. The most well-known structure of this
type is Elliott Wave theory. Here one assumes that the impulses of
fear and greed follow a distinct wave pattern. Basically, the market
is thought to consist of five up waves followed by three corrective
waves. For example, the major upthrust of the market would consist of five waves up (with waves 2 and 4 being in the opposite
direction) followed by three waves down (with the middle wave
being in the opposite direction).

…

For example, the major upthrust of the market would consist of five waves up (with waves 2 and 4 being in the opposite
direction) followed by three waves down (with the middle wave
being in the opposite direction). Each wave has a distinct characteristic, with the third major wave in the series of five being the
most tradable. However, the theory gets much more complex
because there are waves within waves. In other words, there are
Elliott Waves of different magnitudes. For example, the first wave
of the major movement would consist of another whole sequence
of five waves followed by three corrective waves. Elliott, in fact,
decided that there were nine categories of magnitude of waves,
ranging from the Grand Supercycle to the subminuette waves.
Certain rules aid the Elliott Wave theoretician in making decisions about the market. There are also variations to the rules in that
waves may be stretched or compressed and there are some pattern
variations. The nature of those rules and variations is beyond the
scope of this discussion, but the rules do allow you to arrive at market
turning points that are tradable.

…

Thus, if you are a trend follower, you need to find markets that
trend well-be they stocks that show good relative strength or
futures markets that typically show good trends several times each
year. When the market typically has met your trading criteria in the
past, it probably will do so again.
The same goes for any other criteria you may be trading. If
you follow seasonal patterns, then you must trade markets that
show strong seasonal tendencies-agriculture products or energy
products. If you follow Elliott Wave, then you must follow those
markets for which Elliott Wave seems to work best. Whatever your
trading criteria seem to be, you must find the markets that best
meet those criteria.
7. Selection of a portfolio of independen? markets. This topic
is somewhat beyond the scope of this introductory book on devel-
170
PART 3
Understanding the Key Parts of Your System
oping a system. However, I would suggest that you look at the
independence of the various markets you select.

To the extent there is one, it most likely derives from psychology, perhaps in part from the Keynesian idea of conventionally anticipating the conventional response, or perhaps from some as yet unarticulated systemic interactions. “Unarticulated” is the key word here: The quasi-mathematical jargon of technical analysis seldom hangs together as a coherent theory. I’ll begin my discussion of it with one of its less plausible manifestations, the so-called Elliott wave theory.
Ralph Nelson Elliott famously believed that the market moved in waves that enabled investors to predict the behavior of stocks. Outlining his theory in 1939, Elliott wrote that stock prices move in cycles based upon the Fibonacci numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, . . . , each successive number in the sequence being the sum of the two previous ones). Most commonly the market rises in five distinct waves and declines in three distinct waves for obscure psychological or systemic reasons.

…

(Biorhythm theory is the idea that various aspects of one’s life follow rigid periodic cycles that begin at birth and are often connected to the numbers 23 and 28, the periods of some alleged male and female principles, respectively.) It also brings to mind the ancient Ptolemaic system of describing the planets’ movements, in which more and more corrections and ad hoc exceptions had to be created to make the system jibe with observation. Like most other such schemes, Elliott wave theory founders on the simple question: Why should anyone expect it to work?
For some, of course, what the theory has going for it is the mathematical mysticism associated with the Fibonacci numbers, any two adjacent ones of which are alleged to stand in an aesthetically appealing relation. Natural examples of Fibonacci series include whorls on pine cones and pineapples; the number of leaves, petals, and stems on plants; the numbers of left and right spirals in a sunflower; the number of rabbits in succeeding generations; and, insist Elliott enthusiasts, the waves and cycles in stock prices.

…

The ratio of any Fibonacci number to its predecessor is close to the golden ratio of 1.618 . . . , and the bigger the numbers involved, the closer the two ratios become. Consider again, the Fibonacci numbers, 1, 2, 3, 5, 8, 13, 21, 34, 55, . . . . The ratios, 5/3, 8/5, 13/8, 21/13, . . . , of successive Fibonacci numbers approach the golden ratio of 1.618 . . . !
There’s no telling how an Elliott wave theorist dabbling in currencies at the time of the above exchange rate coincidence would have reacted to this beautiful harmony between money and mathematics. An unscrupulous, but numerate hoaxer might have even cooked up some flapdoodle sufficiently plausible to make money from such a “cosmic” connection.
The story could conceivably form the basis of a movie like Pi, since there are countless odd facts about phi that could be used to give various investing schemes a superficial plausibility.

Taking on too much debt to live in more house than a person needs (McMansions as they were called in the boom) is a waste of capital. Mortgage debt is unproductive debt.
Robert Prechter, owner of the Elliott Wave International writes in his book Conquer the Crash that the lending process for businesses “adds value to the economy,” while consumer loans are counterproductive, adding costs but no value. The banking system, with its focus on consumer loans, has shifted capital from the productive part of the economy, “people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).”
Prechter made the point in the November 2009 edition of the Elliott Wave Theorist that banks have lent sparingly to businesses for the past 35 years.
Businesses report that since 1974, ease of borrowing was either worse or the same as it was the prior quarter, meaning that—at least according to business owners—loans have been increasingly hard to get the entire time.

Beyond confidence in their own success, what are some of the other
characteristics of successful traders?
Another important element is that they have a perceptual filter that they
know well and that they use. By perceptual filter I mean a methodology,
an approach, or a system to understanding market behavior. For example,
Elliott Wave analysis and classical chart analysis are types of perceptual
filters. In our research, we found that the type of perceptual filter doesn’t
really make much of a difference. It could be classical
Charles Faulkner / 429
chart analysis, Gann, Elliott Waves, or Market Profile—all these methods
appear to work, provided the person knows the perceptual filter thoroughly
and follows it.
I have an explanation as to why that may be the case.
I’d certainly be interested in hearing it.
I believe a lot of the popular methodologies are really vacuous.

…

Within about a week, I had lost about
one-third of my gains. Normally, when I surrender a meaningful percentage of my profits, I put on the brakes, either trading only minimally
or ceasing to trade altogether. Instinctively, I seemed to be following
the same script on this occasion, as my positions were reduced to minimal levels.
At this time, I received a call from my friend Harvey (not his real
name). Harvey is a practitioner of Elliott Wave analysis (a complex the-
6 / The New Market Wizard
ory that attempts to explain all market behavior as part of a grand
structure of price waves).* Harvey often calls me for my market opinion
and in the process can’t resist telling me his. Although I have usually
found it to be a mistake to listen to anyone else’s opinions on specific
trades, in my experience Harvey had made some very good calls.

…

So I said (I still cringe at the recollection), “OK Harvey, I’ll follow
you on this trade. But I must tell you that from past experience I’ve
found listening to other opinions disastrous. If I get in on your opinion,
I’ll have no basis for deciding when to get out of the trade. So understand that my plan is to follow you all the way. I’ll get out when you
get out, and you need to let me know when you change your opinion.”
Har-
*
The Elliott Wave Principle, as it is formally called, was originally developed by R.
N. Elliott, an accountant turned market student. Elliott’s definitive work on the subject
was published in 1946, only two years before his death, under the rather immodest title:
Nature’s Law—The Secret of the Universe. The application of the theory is unavoidably
subjective, with numerous interpretations appearing in scores of volumes.

Constructing a
trading strategy is essentially a matter of determining if the prices
under certain conditions and for a certain time horizon will be mean
reverting or trending, and what the initial reference price should be
at any given time. (When the prices are trending, they are also said
to have “momentum,” and thus the corresponding trading strategy
is often called a momentum strategy.)
Some people like to describe the phenomenon that prices can
be both mean reverting and trending at the same time as the “fractal” nature of stock prices. Technical analysts or chartists like to
use the so-called Elliott wave theory to analyze such phenomena.
Still others like to use the discipline of machine learning or artificial intelligence (in particular, techniques such as hidden Markov
models, Kalman filter, neural networks, etc.) to discover whether
the prices are in a mean-reverting or trending “regime.” I personally have not found such general theories of mean reversion or momentum particularly useful. (See, however, the section on regime
switching, which describes an apparently successful attempt to predict regime switch for one particular stock.)

Williams also makes a good deal of his background material and reporting on flawed economic data available in open material for nonsubscribers on his Web site. Highly informative, highly recommended. Information at www.shadowstats.com.
The Elliot Wave Theorist
Robert R. Prechter, Jr., is president of Elliott Wave International, which publishes analysis of global stock, bond, currency, metals, and energy markets based on swings in market psychology from extremes of pessimism to optimism. He has been publishing The Elliott Wave Theorist since 1979. I consider his descriptions of the long-term trends in public and investor moods to be superior. Published twelve times a year; $20 per month. www.elliottwave.com.
The High-Tech Strategist
Fred Hickey edits this monthly newsletter. As the name implies, he covers the high-tech industry and its stocks, but he has a good understanding of the fundamental economic issues and has been heavily positioned in gold, and shorts the tech market when necessary. $140 per year; $60 for a three-month trial subscription.

While that apocalyptic vision might suggest a threat to Emergent’s African assets, Murrin figures that in the run-up to war there will be a lot of profit as commodity scarcity causes prices to soar. He embraces other threats, too. “Climate change means some places in Africa will be drier and others will be wetter. We’ll be looking to take advantage of that,” he says.
Murrin also claims to keep ahead of the game by exploiting the Elliott Wave theory of long-term cycles in public mood, alternating between optimism and pessimism. This idea took root when he was in Papua New Guinea, and he discusses it at length in his book, Breaking the Code of History. He says: “There is a tradition that history is about the detail, but I have always believed instead that it is determined on a vast scale, by a specific set of dynamics. Moreover, its apparent randomness is only an illusion: once the sequence of events that we call ‘history’ is shown to be governed by certain behavioural algorithms, we can then discern, with clarity, the degree to which our lives are bound up in numerous interrelationships.”

…

Moreover, its apparent randomness is only an illusion: once the sequence of events that we call ‘history’ is shown to be governed by certain behavioural algorithms, we can then discern, with clarity, the degree to which our lives are bound up in numerous interrelationships.” Phew.
Payne’s presentations, meanwhile, often include a scary graph showing something called the Kondratiev Cycle, after Nikolai Kondratiev, the Russian economist who invented it. I’m not clear how the Elliott Wave and the Kondratiev Cycle relate, if at all. But her graph shows U.S. commodity prices since 1800, rising and falling in a long cycle with spikes roughly every fifty years. Some have claimed that the supposed cycle is created by technological innovations. Others suggest credit cycles or demographics. Payne proposes a link to conflicts. Her graph captions the spikes as linked to the Napoleonic wars in Europe, the American Civil War, the First World War, and the Vietnam War.

This paragraph is based on historical analysis and insights from Herman Daly and John Cobb. See Herman Daly and John Cobb, For the Common Good (Boston: Beacon Press, 1994), pp. 97–120.
11. For a further discussion of this point see Daly and Cobb, op. cit.
12. A periodically updated discussion of the business cycle from various points of view is available at Wikipedia.
13. Though not according to economists who subscribe to the Elliott Wave theory. See A. J. Frost and Robert Prechter, Elliott Wave Principle: Key to Market Behavior (Gainesville, GA: New Classics Library, 2006).
14. This appears to be the opposite of what is happening now — money is tight but interest rates are low. The current situation exists because the Federal Reserve is deliberately keeping interest rates low to stimulate economic activity.
15. See Bruce Jansson, The Sixteen-Trillion-Dollar Mistake (New York: Columbia University Press, 2002).
16.

It costs, of course, but what’s a little bit of money when a guru is guaranteeing you a spot in a lifeboat being lowered from the economic Titanic?
Almost all sellers of doom are excellent marketers. Many send out almost daily e-mail blasts, like Robert Prechter, whose company promotes the impossibly complicated Elliott Wave, a creation of a Depression-era accountant that plots public mood in numerical waves, using the patterns to predict stock market returns. If you are wondering, the Elliott Wave most recently predicted that the Dow would fall to one thousand and oil to $10 a barrel. There is also a conference circuit, including the almost forty-year-old New Orleans Investment Conference (founded in 1973) and more recent entrants such as Agora Financials annual July gathering in Vancouver, which offers up “actionable investment ideas.”

More recently, in early 2010, the world’s leading forecaster applying fractals to markets, Robert Prechter, called for the market to enter a decline of such staggering proportions that it would dwarf anything that has happened in the past three hundred years.16 Prechter bases his methodology on the insights of a 1930s economist, Ralph Nelson Elliott, who isolated a number of the patterns that seem to recur in market price data. They didn’t always occur over the same timescale or amplitude, but they did have the same shape. And they combined to form larger and larger versions of themselves at higher levels, in a highly structured progression.
Prechter calls this progression the Elliott Wave. We may as well call it fractalnoia. For not only is the pattern supposed to repeat on different scales and in progressively larger time frames; it’s also supposed to be repeating horizontally across different industries and aspects of human activity. Prechter titled his report on fractals and the stock market “The Human Social Experience Forms a Fractal.” And, at least as of this writing, the biggest market crash since the South Sea Bubble of 1720 has yet to occur.

Computer software enables the technical analyst to switch from one chart type
to another.
Technical analysis caters also for those who shun simplicity. William D
Gann was a technician with a unique, highly mathematical form of technical
analysis linking price and time proportionately, with lashings of special
numbers and astrological inferences. Courses in Gann theory tend not to come
cheap.
Elliott Wave Theory is another tough nut to crack. It ﬁnds that the market
always rises in ﬁve waves and falls in three, and so assumes a perpetual
long-term bull market. The proportional relationship of the waves is linked
to Fibonacci numbers, which have a mathematical relationship claimed to be
deep-rooted in nature.
Many equities professionals in the City regard technical analysis as a
somewhat fringe activity, but others take it more seriously.

Kondratiev’s teachings had helped Cilluffo to anticipate the crash of 1973, which presumably meant that the next cataclysm was not due until 1997; yet in 1987 Jones nonetheless believed that the theory reinforced the case that “total rock and roll” was imminent. Jones was even more enamored of Elliott wave analysis, as expounded by an investment guru named Robert Prechter. The guru asserted with great confidence that stocks would experience one last upward explosion before plunging at least 90 percent: It would be the greatest crash since the bursting of the South Sea bubble in England in 1720. Jones told one interviewer, apparently in all sincerity, “I attribute a lot of my own success to the Elliott Wave approach.”11 But Prechter’s predictions of disaster were wildly overblown, and even Jones agreed that Prechter had no way of pinpointing when the crash would happen.12
The truth was that Jones’s trading profits came from agile short-term moves, not from understanding multidecade supercycles whose existence was dubious.

…

For the same reason, he’ll probably be long at the all-time top.” Laing, “Trader with a Hot Hand.”
13. The quote comes from the Trader documentary. Jones also said, “I consider myself a premier market opportunist. That means I develop an idea on the market and pursue it from a very low risk standpoint until I have repeatedly been proven wrong, or until I change my viewpoint.” See Schwager, Market Wizards, p. 129. Putting Jones’s theorizing about Elliott waves further into perspective, Jones says, “The whole concept of the investment manager sitting up there and making all these incredible intellectual decisions about which way the market’s going to go. I don’t want that guy running my money because he doesn’t have the competitive nature that’s necessary to be a winner in this game.”
14. Elaborating on how he would write a script for the market, Jones says, “I put myself in the mental position of being short the market, and I think how I would react emotionally to different events and see what it would take to get me to take my position off.

They can neither fathom the concept of sunk
costs nor admit that buy-and-hold might not work. So they buy and
hold no matter what happens in the mean time.
There is the old trading parable about fishing and revenge. You
are out at the fishing hole. The big one gets away, and you throw
You will run out of money
before a guru runs out of
indicators.
Neal T. Weintraub
234
There is little point in
exploring the Elliott Wave
Theory because it is not a
theory at all, but rather
the banal observation
that a price chart
comprises a series of
peaks and troughs.
Depending on the time
scale you use, there can
be as many peaks and
troughs as you care to
imagine.7
Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets
your hook back in. Are you only after the one that got away? Of
course not, you throw the hook back in to catch a big fish—any big
fish.

…

• Trend trader Charlie Wright states: “It took me a long time to
figure out that no one really understands why the market does
what it does or where it’s going. It’s a delusion to think that you
or any one else can know where the market is going. I have sat
through hundreds of hours of seminars in which the presenter
made it seem as if he or she had some secret method of
divining where the markets were going. Either they were
deluded or they were putting us on. Most Elliott Wave
practitioners, cycle experts, or Fibonacci time traders will try
to predict when the market will move, presumably in the
direction they have also predicted. I personally have not been
able to figure out how to know when the market is going to
move. And you know what? When I tried to predict, I was
usually wrong, and I invariably missed the big move I was
anticipating, because it wasn’t time.

That evening taught me a couple of lessons about Wall Street I haven’t forgotten: things aren’t always what they seem; and the interests of financial insiders often differ from those of regular investors.
In retrospect, the size of the fall in the market wasn’t very surprising, only its rapidity. The Dow had more than doubled in three years, prices had shot well ahead of earnings, and a number of commentators, such as Elaine Garzarelli, of Shearson Lehman, and Robert Prechter, of The Elliott Wave Theorist newsletter, had issued sell warnings. To the economics profession, though, the crash came as a thunderbolt. According to the efficient market hypothesis, which was then at the zenith of its popularity, big market moves happen only in response to news that has major implications for corporate earnings. There was no such news on or before Black Monday. The previous week, Congress had moved to eliminate a tax break for corporate takeovers, and the August trade deficit came in higher than expected, adding to worries that the Fed might raise interest rates, but neither of these things could conceivably have accounted for a 22.6 percent fall in the value of corporate America.

The many kinds of structures observed
on stock price trajectories, such as trends, cycles, booms, and bursts,
have been the object of extensive analysis by the scientists of the social
and ﬁnancial ﬁelds as well as by professional analysts and traders. The
work of the latter category of analysts has led to a fantastic lexicon of
these patterns with colorful names, such as “head and shoulder,” “doublebottom,” “hanging-man lines,” “the morning star,” “Elliott waves,” and
so on (see, for instance, [316]).
Investments in the stock market are based on a quite straightforward
rule: if you expect the market to go up in the future, you should buy
(this is referred to as being “long” in the market) and hold the stock
until you expect the trend to change direction; if you expect the market
to go down, you should stay out of it, sell if you can (this is referred to
as being “short” of the market) by borrowing a stock and giving it back
later by buying it at a smaller price in the future.

A new market cycle guru emerges in almost every major stock cycle, once every 4 years. A guru's fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States.
A market cycle guru forecasts rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his pronouncements. A market cycle guru has a pet theory about the market. That theory—cycles, volume, Elliott Wave, whatever—is usually developed several years prior to reaching stardom. At first, the market refuses to follow an aspiring guru's pet theory. Then the market changes and for several years comes in gear with the guru's calls. That is when the guru's star rises high above the marketplace.
Compare this to what happens to fashion models as public tastes change. One year, blondes are popular, another year, redheads.

Bubbles are dramatic—but the tendency of markets to deceive and confuse is an everyday affair. Consider chartists, who try to spot patterns in the market. The sophistication of these techniques varies greatly. Some are mere eyeball hunches: A pattern in an index or price chart looks like one that has happened before, and so you bet the chart will keep moving in the same way. Others are more elaborate. The best-known example is the Elliott Wave. Ralph Nelson Elliott was a Kansas-born accountant who spent much of his working life reorganizing railroads and state finances in Central America and who, during a debilitating illness, devised a new charting methodology. Investor psychology, he felt, moves in waves of optimism and pessimism; and these waves can be seen in the stock market again and again, at different times and at different time-scales.

Prechter became interested in the parallels between social psychology and the stock market while a Yale undergraduate. After college, Prechter spent four years playing drums in a rock band, after which he joined Merrill Lynch as a junior technical analyst. There Prechter stumbled on the work of an obscure accountant, R. N. Elliott, who had devised an arcane theory which he modestly entitled the Elliott wave theory. Elliott’s premise was that there were predictable waves of investor psychology and that they steered the market with natural ebbs and flows. By watching them, Elliott believed, one could call major shifts in the market. Prechter was so excited about this discovery that he quit Merrill Lynch in 1979 to write an investor newsletter from the unlikely location of Gainesville, Georgia.
Prechter’s initial predictions were uncannily accurate.